Suppose That the Economy Is in Long-Run Equilibrium and the Government

question 128

Multiple Choice

Suppose that the economy is in long-run equilibrium and the government decided to engage in unexpected expansionary policy by increasing the money supply. If we assume rational expectations, which of the following statements is correct about the effect of expansionary policy in the long run?

• A) The unemployment rate will increase, real GDP will increase and the price level will increase.
• B) The unemployment rate will decrease, real GDP will decrease and the price level will decrease.
• C) The unemployment rate will remain unchanged, real GDP will remain unchanged and the price level will increase.
• D) The unemployment rate will remain unchanged, real GDP will remain unchanged and the price level will decrease.

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Definitions:

Inelastic

A situation in which the demand for a product does not increase or decrease correspondingly with a fall or rise in its price.

Perfectly Elastic

Describes a situation where the quantity demanded or supplied changes infinitely in response to any change in price.

Equilibrium Quantity

The quantity of goods or services that is supplied and demanded at the equilibrium price, where market supply and demand balance each other.

Equilibrium Price

The market price at which the quantity of goods supplied is equal to the quantity of goods demanded.